News & opinion

24 MAR 2019

Technology and the fight against money laundering

Blockchain can be the bedrock of a transparent real estate market, says PWC’s Akihiko Katayama.

Picture the real estate industry as a marketplace, with free-wheeling, high-value transactions of assets and services. These all take place in a chaotic bazaar where the identity of investors can be very difficult to pinpoint; funds can be obtained from illegal origins; payments could be sent to fund crime or terrorism. All these elements leave the real estate market very vulnerable to abuse by money laundering.

Blockchain can solve many of these problems. We typically think of the technology as a way to eliminate friction in global financial transactions. But the real estate industry can also benefit: from the way it enables the highly efficient transfer of assets and services, and as a means of combating money laundering. Blockchain provides a firm foundation for the trusted exchange of assets and services. It is the bedrock of a better-organised market with easily identified, sourced and tracked parties on all sides of a deal.

At its root, blockchain is an immutable digital ledger. But it can also go far beyond basic record-keeping. The ledger can be an extended inventory of anything of value. The most obvious comes in the form of digital assets such as cryptocurrency, but it could also include the digital identities of buyers, sellers and intermediaries; digital land records and property specifics; digital funding sources from financial products such as securities or debt; the footprint of conditions on transactions; and "smart contracts" that also provide a record of the time and exact nature of exchange.

We cannot clean up a market if the information isn't trusted as immutable. Once it is, we can work to identify and address the issues.

Akihiko Katayama, Director, PWC in Hong Kong

Money laundering basically amounts to bad people moving bad money through what look like good transactions. Trying to separate the good from the bad is difficult when so many deals are opaque or hidden on papers that get pushed between parties. Put that information through a blockchain, and you get a clearer view of what happens between buyer and seller. Obscure identities can be revealed, the origin and destination of funds made clear, and complex activities recorded for future reference.

Of course, this assumes that we can create the right kind of digital identities and records in the first place. This puts a big burden on the due diligence done by on-boarding parties and the quality of their digital wallets – where parties store their assets. We already have reams of existing records documenting licensing, the exchange of titles, and so on. Once digitised, advances in artificial intelligence will enable us to verify the digital representation of an identity, asset or service automatically. These identities, however obscure, will then remain as information for future reference.

We cannot clean up a market if the information isn't trusted as immutable. Once it is, we can work to identify and address the issues. This will help counteract the continued use of offshore-registered corporations, tax havens and domiciles that don't ask any questions.

Yet there are transparency questions to ask ourselves. Do we want every detail to be recorded, such as our bank balance when we apply for a mortgage? What happens to concepts like the "right to forget"? These are difficult questions to answer. But it is likely that the future benefits – a trusted marketplace, a smoother exchange of goods and services and a clear inventory of identity – will outweigh the concerns.

Looking further ahead, blockchain also promises innovation in the structure of real estate itself via tokenisation, whereby assets are converted into smaller digital chunks to be distributed among different buyers and sellers frequently and instantly. It will surely also give rise to new real estate investment vehicles and services that we can't currently imagine today.